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Cornell University Law School Scholarship@Cornell Law: A Digital Repository Cornell Law Faculty Publications Faculty Scholarship 11-2016 Don't End or Audit the Fed: Central Bank Independence in an Age of Austerity Neil H. Buchanan George Washington University Law School Michael C. Dorf Cornell Law School, [email protected] Follow this and additional works at: http://scholarship.law.cornell.edu/facpub Part of the Banking and Finance Law Commons, and the Law and Economics Commons Recommended Citation Neil H. Buchanan and Michael C. Dorf, "Don't End or Audit the Fed: Central Bank Independence in an Age of Austerity," 102 Cornell Law Review (2016) This Article is brought to you for free and open access by the Faculty Scholarship at Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in Cornell Law Faculty Publications by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contact [email protected]. DON'T END OR AUDIT THE FED: CENTRAL BANK INDEPENDENCE IN AN AGE OF AUSTERITY Neil H. Buchanant & Michael C. Dorft The Federal Reserve (the Fed) is the central bank of the United States. Because of its power and importance in guid- ing the economy, the Fed's independencefrom direct political influence has made it a target of ideologically motivated at- tacks throughout its history, with an especially aggressive round of attacks coming in the wake of the 2008 financial crisis and ongoing today. We defend Fed independence. We point to the Fed's exemplary performance during and after the 2008 crisis, and we offer the example of a potential future crisis in which Congress falls to increase the debt ceiling to show how the Fed's independence makes it the only entity that can minimize the damage during crises (both market- driven and policy-induced). We further argue that the Fed's independence isjustifted to prevent self-dealing by politicians, even when no crisis is imminent. Although the classicjustifi- cationfor Fed independence focuses on the risk that political actors will keep interest rates lower than appropriatefor the long-term health of the economy, we show that Fed indepen- dence addresses the risk of self-dealing and otherpathologies even when, as now, political actors favor tighter monetary policy than appropriate for the long-term health of the economy. INTRODUCTION ........................................... 2 I. AN INDEPENDENT CENTRAL BANK: THE STRUCTURE AND POWERS OF THE FED ............................... 12 A. Structure of the Fed .......................... 15 B. Powers of the Fed ............................ 16 t Professor of Law, The George Washington University Law School, and Se- nior Fellow at the Taxation Law and Policy Research Institute, Monash University. t Robert S. Stevens Professor of Law, Cornell Law School. The authors thank Sherry Colb, Peter Conti-Brown, Cynthia Farina, Robert Hockett, Martin Leder- man, Dina Mishra, Saule Omarova, Steven Shiffrin, Lawrence Solum, Jed Stiglitz, Lynn Stout, Charles Whitehead, David Zaring, and the participants in the Ge- orgetown Constitutional Law Colloquium for helpful comments and conversa- tions. Zachary Baum, Chelsea Kirkpatrick, Justin Mungai Ndichu, Neela Pack, and Christina Reda provided excellent research assistance. 1 2 CORNELL LAW REVIEW [Vol. 102: 1 C. Why Is the Fed Independent, and What Does That Entail?. ............................. 21 II. CRITICISMS OF THE FED ......................... 25 A. Statutory Authority........................... 25 B. Transparency ................................ 30 C. Substantive Priorities...................... 35 III. How THE FED SAVED THE ECONOMY, AND WHY IT MIGHT HAVE TO Do So AGAIN .................... 43 A. The Fed, the Existential Crisis of 2008-09, and the Aftermath ............................ 44 B. The Debt Ceiling and the President's Options During a Standoff ......................... 51 C. The Dangers of Requiring the Fed to Use Its Full Powers .............................. 59 IV. JUSTIFYING FED INDEPENDENCE ................... 63 A. From Expertise to Self-Dealing ................ 65 B. Pathology and Spandrels ................... 73 C. An Insider/Outsider Role ................... 79 CONCLUSION ...................................... 83 INTRODUCTION During the financial crisis of 2008 and for much of the deep recession that followed, the Board of Governors of the Federal Reserve System (the Fed)' took crucial steps to prevent the United States and the global economy from falling into a depression. Elected officials also acted. The Bush administra- tion quickly devised the Troubled Assets Relief Program (TARP), which Congress first rejected but then enacted. 2 In its first 1 Congress established the Federal Reserve System in 1913 to serve as the central bank of the United States. The Fed's key functions include formulating the country's monetary policy, maintaining the stability of the financial system, containing systemic risks, regulating financial institutions, and providing various financial services to depository financial institutions and to the federal govern- ment. The Fed consists of a central, independent government agency (the Board of Governors), the Federal Open Market Committee (FOMC), and twelve regional Federal Reserve Banks. The Board of Governors and the FOMC effectuate mone- tary policy in pursuit of maximum employment, stable prices, and moderate long- term interest rates. See 12 U.S.C. § 225a (2012); FED. RESERVE SYS., ROLES AND RESPONSIBILITIES OF FEDERAL RESERVE DIRECTORS 11 (2013), http://www.federalre serve.gov/aboutthefed/directors/pdf/roles-responsibilitiesFINALwebO 13013. pdf [https://perma.cc/KE87-PB67]. 2 The first version of the Emergency Economic Stabilization Act, debated in the House as H.R. 3997, was voted down 228-205 on September 29, 2008. See On Concurringin Senate Amendment with an Amendment: H.R. 3997 to Amend the Internal Revenue Code of 1986 to Provide Earnings Assistance and Tax Relief to members of the Uniformed Services, Volunteer Firefighters, and Peace Corps Volunters, andfor Other Purposes, GovTRACK, https://www.govtrack.us/congress /votes/ 110-2008/h674 [https://perma.cc/K46D-CNZG] (vote tally). A second 2016] DON'T END OR AUDIT THE FED 3 months in office, the Obama Administration sought and ob- tained a substantial package of spending aimed at stimulating the economy.3 And building on efforts begun by President Bush, President Obama rescued the U.S. automobile industry by arranging for federal government-backed debtor-in-posses- sion financing for General Motors.4 Yet these efforts were mod- est in scale relative to those of the Fed.5 Moreover, after Republicans in Congress succeeded in limiting the size of the fiscal stimulus program such that it was too small from the outset,6 politicians of both parties too quickly set their sights on deficit reduction.7 Tea Party-affiliated congressional Repub- version, H.R. 1424, passed the Senate on October 1, 2008 and the House 263-171 on October 3, 2008. See H.R. 1424 (110th): PaulWellstone Mental Health and Addiction Equity Act of 2007, GovTRACK, https://www.govtrack.us/congress/ votes/i 10-2008/h681 [https://perma.cc/QF6P-E8EV (vote tally for bill creating TARP). 3 See American Recovery and Reinvestment Act of 2009, Pub. L. No 111-5, 123 Stat. 115 (2009). 4 See In re Gen. Motors Corp., 407 B.R. 463, 480 (Bankr. S.D.N.Y. 2009); CONG. OVERSIGHT PANEL, SEPTEMBER OVERSIGHT REPORT: THE USE OF TARP FUNDS IN THE SUPPORT AND REORGANIZATION OF THE DOMESTIc AUTOMOTIVE INDUSTRY 4-19 (2009), http://www.gpo.gov/fdsys/pkg/CHRG-111shrg51964/html/CHRG-111 shrg51964.htm [https://perma.cc/8J62-GD9S); U.S. DEP'T OF THE TREASURY, AGENCY FINANCIAL REPORT, FISCAL YEAR 2009 144-49 (2009), http://www.treasury. gov/about/organizational-structure/offices/Mgt/Documents/09AFR Treasury Tagged_07.pdf [https://perma.cc/T5NU-TrNL]; PRESIDENT'S AUTO TASK FORCE, OBAMA ADMINISTRATION NEW PATH TO VIABILITY FOR GM & CHRYSLER 2-3, https:// www.whitehouse.gov/assets/documents/FactSheetGMChrysler-FIN.pdf [https://perma.cc/72UP-KR6U]; Brent J. Horton, The TARP Bailout of GM: A Le- gal, Historical, and Literary Critique, 14 TEX. REV. L. & POL. 217, 249 (2010). 5 Monetary policy was roughly an order of magnitude larger than fiscal pol- icy. See generally CONG. OVERSIGHT PANEL, MARCH OVERSIGHT REPORT: THE FINAL REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL 162-64 (2011), http://www.gpo. gov/fdsys/pkg/CHRG-112shrg64832/pdf/CHRG-112shrg64832.pdf [https:// perma.cc/EH46-G6ZX (quantifying measures taken by the Fed); OFFICE OF THE SPECIAL INSPECTOR GEN. FOR THE TROUBLED ASSET RELIEF PROGRAM, SIG-QR-09-03, QUARTERLY REPORT TO CONGRESS 4, 38, 140, 152, 156 (2009), http://www.sigtarp. gov/Quarterly/20Reports/July2O09-QuarterlyReportLtoCongress.pdf [https:/ /perma.cc/R44J-WZ6U] (quantifying TARP assistance and Fed programs). 6 See, e.g., Paul Krugman, Opinion, Franklin Delano Obama?, N.Y. TIMES (Nov. 10, 2008), http://www.nytimes.com/2008/11/10/opinion/10krugman. html [https://perma.cc/WEP6-CLED]; Paul Krugman, Opinion, Let's Get Fiscal, N.Y. TIMES (Oct. 16, 2008) http://www.nytimes.com/2008/10/17/opinion/17 krugman.html [https://perma.cc/T24W-4XVF]; Lawrence Summers, Opinion, Mr. Obama's Stimulus Plan Must Aim for Long-Term Results, WASH. POST (Dec. 28, 2008), http://www.washingtonpost.com/wp-dyn/content/article/2008/12/26/ AR2008122601299.html?nav=HCmoduletmv [https://perma.cc/S243-3FDJ] ("In this crisis, doing too little poses a greater threat than doing too much."). 7 See Budget Committee
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